1) CFO Insights
Six steps to transforming tax
As globalization accelerates, tax issues often become
more complex and relevant to an organization&rsquo;s business
strategies. At the same time, companies face demands by
tax authorities for more information faster&mdash;demands that
are only going to increase (see sidebar, &ldquo;BEPS: What to
expect next,&rdquo; page 2). They also face a growing number
of IT challenges as commercial tax applications evolve to
satisfy regulatory mandates.
In response, some leading companies have made
a fundamental shift in the way they operate tax
departments, transforming the tax function into a strategic
business partner across the enterprise. And given that
the implications of tax affect the financial and strategic
decisions of many organizations, such tax-transformation
activities typically are closely aligned with business
strategy.
In fact, when participants on a recent Deloitte webcast
(The Transformation of Tax: Something Big Is
Happening Here, July 2014) were asked, &ldquo;What is the
biggest advantage to transforming the corporate tax
department?&rdquo; 26% of the 2,182 respondents indicated
&ldquo;having an enhanced ability to reach strategic and
financial goals.&rdquo; Another 24% reported &ldquo;enhanced
business partnering across the organization,&rdquo; such as
greater alignment between the tax and finance functions,
and 22% cited &ldquo;sustainability and efficiency of the tax
function through cost savings.&rdquo;
For CFOs, tax transformations may seem a natural
evolution. After all, many finance executives have
gone through a finance function transformation and
are experiencing the benefits of that strategic change.
Not surprisingly, they are increasingly expecting the tax
department to undertake a similar process and produce
concrete results, such as completing the tax close faster. In
this issue of CFO Insights, we&rsquo;ll outline the steps for such
a successful tax transformation and examine how it may
expand the function&rsquo;s responsibilities.
Expanding tax responsibilities
Tax transformation will likely expand the department&rsquo;s
responsibilities from traditional tax functions, such
as those related to the company&rsquo;s tax profile and tax
planning, reporting, and risk management, to broader
areas, such as the following:
Process, technology, and data. Many tax departments
are looking to establish global tax processes, integrate
technology across business functions, and maintain the
quality of data used by the tax function.
Sustainability and efficiency. The focus remains on
reducing the cost of the global tax function, delivering
high-quality services at a low cost in mature areas, aligning
with statutory accounting, and increasing tax partnerships
across the enterprise.
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2) BEPS: What to expect next
Increasingly, governments are raising issues concerning
transactions that have the potential to diminish their
tax bases, particularly those that may have the effect of
shifting profits from higher- to lower-tax jurisdictions. Their
concerns have led to an initiative led by the Organization
for Economic Co-operation and Development (OECD) to
address so-called base erosion and profit shifting (BEPS),
referred to as the OECD/G20 BEPS Project.
This project involves representatives of at least 44
countries&mdash;and covers &ldquo;about 90% of the world economy,
so it&rsquo;s a fairly comprehensive group,&rdquo; says Gretchen Sierra,
partner, Deloitte Tax LLP.
Goals include consistency of international tax rules and
outcomes, and greater disclosure surrounding crossborder transactions. However, each country has its own
policy perspective and is responsible for enacting its own
tax laws.
To date, papers on more than half of 15 planned actions
have been presented to the G20 leaders, and discussion
drafts dealing with the other seven have been released for
public comment, with finalization of all papers due at the
end of 2015. While the United States has not responded
in the near-term, five countries have already enacted BEPSinfluenced legislation, particularly with respect to interest
deductibility.
Here are some of the other areas to watch:
Country-by-country report. The CbC report is designed
to create a common platform for reporting across all
countries, thereby providing tax authorities visibility into
taxpayers&rsquo; allocation of income across the globe. Despite
a goal of transparency, however, controversy may ensue.
When asked what their main concern with respect to the
CbC report was,&rdquo; 28% of 1,476 participants on a recent
Deloitte webcast indicated it was the cost of compliance,
and 24% cited &ldquo;increased controversy and double
taxation.&rdquo;
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Intangibles and transfer pricing. There is more work
to be done in the area of transfer pricing as it relates
to intangible property (and other matters). Issues to
be addressed include ownership of intangibles, risk
and capital, and recharacterization of transactions for
hard-to-value intangibles. In its work, the BEPS Project
has proposed changes to the OECD Transfer Pricing
Guidelines, laying out steps to determine the return on
investment from intangible property. During the webcast,
participants were asked, &ldquo;In considering the allocation of
returns attributable to intangibles, which of the following
functions is the most significant for your company?&rdquo;
Topping the list was &ldquo;control over strategic decisions
regarding intangible development programs&rdquo; (18.7%).
Hybrid instruments. There may be instances in which
hybrid instruments are used within multinational groups to
take a deduction with no corresponding income inclusion
subject to taxation. Apart from tax considerations, many
US multinationals use hybrid instruments in their dayto-day business operations. Further study is needed to
determine whether the taxation of these transactions
should be affected by anti-BEPS measures. But as Tim
Tuerff, partner, Deloitte Tax LLP, notes, &ldquo;The need to
make sure those transactions can be executed in the
marketplace is quite important, independent of the tax
ramifications.&rdquo;
Tax treaty considerations. Potential changes to the OECD
Model Tax Convention are also part of the BEPS Project.
Many countries view the US&rsquo;s limitation on benefits articles
as under- and over-inclusive, and an outstanding question
is whether the OECD will adopt a US-style limitation on
benefits article or something else. In general, &ldquo;there is
agreement among the drafters,&rdquo; says Harrison Cohen,
director, Deloitte Tax LLP, &ldquo;that at a minimum every treaty
should contain an express statement that the common
intention is to eliminate double taxation without creating
opportunities for non-taxation or reduced taxation
through tax avoidance or evasion, including through treaty
shopping.&rdquo;

3) Tax operating models. New approaches are being
developed to meet heightened expectations of
sustainability and efficiency in traditional roles and to
determine the appropriate sourcing mix for the tax
department from various models, including in-house,
outsourced, offshore, and shared services.
&bull; Prioritize opportunities. Consider the future tax
department and prioritize a subset of responsibilities
on which to focus based on the potential value to the
organization. Then set priorities to help decide how
resources should be invested to make the greatest
impact.
To make breakthrough improvements and transform the
tax function, however, it is critical to enhance processes,
technology, and data. One barrier: many companies often
are not as automated as they could be with respect to
data and the integration of tax processes with related
business processes. That divide is often caused by a lack of
tax-integrated enterprise solutions.
&bull; Develop initiatives and mobilize. Dig into root causes
and identify potential approaches to address highpriority competency areas. Develop an action plan with
key milestones and owners.
Another barrier: given that tax is likely the largest reuser of data in a company, it becomes difficult for tax
professionals to make major improvements in data when
it is not part of a larger finance transformation effort. For
major transformation to be effective, companies need a
baseline of tax technology, which many already have, and
the vision to introduce new models, such as standardizing
tax processes globally and integrating tax and statutory
accounting with tax.
Six steps to effective tax transformation
To move forward with a tax transformation effort,
there are six tactics an organization should consider
incorporating into a strategic plan:
&bull; Define a tax department vision. Focus on a shared
vision of key characteristics that define what the
department will look like in three-to-five years.
&bull; Understand perspectives and expectations. Gain
insight from tax stakeholders and customers, such as
the business unit leaders. Identify challenges that can
be addressed by transformation initiatives, including
realigning stakeholder goals with the tax department&rsquo;s
view of the future.
&bull; Assess effectiveness. Confirm the key competencies of
the tax department and determine what opportunities
may exist to improve performance or create more value
for the business.
&bull; Confirm the department&rsquo;s commitment. Identify
areas of confidence and concern relative to executing
against the tax department&rsquo;s initiatives and commit
to specific actions. This often requires an assessment
of the department&rsquo;s ability to deliver on initiatives,
identify critical factors and risks, and develop mitigation
strategies.
Securing buy-in and funding
Accomplishing game-changing transformation within the
tax department requires the buy-in of other executives.
After all, while tax executives are in a great position
to lead, control, and drive a transformation, they
need support from CFOs and others. From a process
perspective, it is important to start securing buy-in from
stakeholders immediately after establishing a solid vision
for a tax transformation initiative. Upfront and periodic
stakeholder interactions can help provide the knowledge
needed to integrate the transformation with the business.
Gaining appropriate levels of funding and support for the
tax transformation also is important for the transformation
to be effective. Tax leadership should make clear the
potential benefits of a transformation, including both hard
benefits, such as possible tax savings, and soft benefits,
such as efficiencies gained and risks mitigated. In addition,
tax executives should work with their CFOs to define the
return on investment (ROI) of a transformation initiative
and measure against it. If the ROI is unacceptable,
priorities may have to be reworked, which may limit the
approach, but still provide certain benefits.
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